DGCL Sec. 123 - Ownership of securities

Headnote

Prior to the adoption of general incorporation statutes, corporations were regularly prohibited from owning stock or securities of other corporations. By specifically permitting a corporation to own and vote the stock of another corporation, §123 makes possible the “holding company” structure.

A holding company is a corporation that has no operations but holds assets in the form of stock of subsidiary operating corporations. This hierarchial business structure is now quite common in the US and has a number of obvious benefits. First and foremost, the holding company structure permits the parent corporation to hold risky assets at arm's length, utilizing the subsidiary's limited liability shield to prevent an adverse risk in one business unit from affecting the entire business operation. The holding company structure also makes it easier to buy and sell corporate assets. Rather than engage in an corporate level merger or sale, the board of directors of a holding company can buy or sell divisions by simply transfering the shares of the division to or from a buyer. For these reasons, and others, the holding company structure has become ubiquitous.